Swiss Centre: When a £33 Million Payment Is Not Deductible
The Upper Tribunal has recently released its decision in Swiss Centre Ltd v HMRC. On the facts, it is a highly unusual case involving a major property development, the aftermath of the financial crisis, complex group financing arrangements, guarantees, distressed debt acquired by NAMA, and a disputed deduction of around £33.5 million.
Most advisers are unlikely ever to encounter a fact pattern remotely similar to the one before the Tribunal. Nevertheless, the decision contains some useful reminders about the way the courts approach deductions and, perhaps more importantly, the degree of uncertainty that can arise where a payment serves several different commercial purposes.
The dispute
The dispute in this case concerned a payment made as part of arrangements that enabled the sale of the Swiss Centre in London. The taxpayer argued that the payment should be deductible either under the loan relationship rules or, alternatively, as expenditure deductible in computing a chargeable gain.
The taxpayer’s case was, broadly, that the payment had been made in order to secure the release of security and allow the sale to proceed. HMRC argued that the position was considerably more complicated and that the payment formed part of a wider package designed to benefit a number of entities and individuals connected with the wider group. The First-tier Tribunal accepted HMRC’s analysis and the Upper Tribunal has now upheld that decision.
The analysis
What makes the case interesting is not so much the ultimate outcome as the Tribunal’s reasoning. The taxpayer was unable to persuade the Tribunal that the payment had been made solely for the purpose that it identified. Instead, the Tribunal found that there were several overlapping commercial objectives. These included facilitating the sale itself, addressing wider indebtedness within the group, avoiding the consequences of enforcement action, and preserving the position of other entities within the wider structure. Once those findings had been made, the taxpayer’s arguments became much harder to sustain.
The lesson?
The decision is a useful reminder that identifying the legal mechanism by which a payment is made is only part of the exercise. The courts will often be equally concerned with why the payment was made. Where there are multiple motives, multiple beneficiaries, or wider commercial objectives, the tax consequences can become much less predictable. That point extends well beyond the rather extraordinary facts of this case.
In practice, many transactions involve payments which are made to unlock a deal, satisfy a lender, obtain a consent, resolve a dispute, settle a guarantee, or remove an obstacle to completion. Advisers will often be asked whether such payments are deductible. The temptation is to focus on the immediate commercial objective. If the payment was needed to complete the transaction, surely it should be deductible?
Conclusion
Swiss Centre illustrates the danger of that assumption. The Tribunal was prepared to stand back and examine the wider commercial context. Where a payment produces benefits extending beyond the particular transaction in question, or where several objectives are being pursued at the same time, the analysis may become considerably more complicated. That does not mean the taxpayer will necessarily lose. Equally, it does not mean HMRC will necessarily win. However, it does mean that outcomes can be less certain than clients and advisers sometimes assume.
The case is also a reminder that large and unusual payments invariably deserve careful analysis before the tax return is submitted. The commercial rationale which appears obvious to those involved in a transaction is not always the rationale that a tribunal will identify several years later when reviewing the evidence.